4/24/2009 @ 5:30PM

China's Hoarding Gold

Despite all its recent talk about being down on the dollar, China hasn’t been building its gold reserves as quickly as it’s been amassing U.S. dollars, the country revealed when it gave a rare disclosure about its total gold holdings on Friday.

Hu Xiaolian, the head of China’s State Administration of Foreign Exchange told Xinhua news agency that the country has added 454 metric tons to its gold reserves since 2003 when it said reserves totaled 600 metric tons. Purchases were made off the exchange as private transactions, Hu said which explains the global surprise by the Friday announcement.

The recent buying brings China’s total gold reserves to 1,054 metric tons and the ratio of gold to total reserves to 1.6% from 1.7% in 2003, according to Tom Pawlicki, a precious metals and energy analyst at MF Global. It also places them fifth among countries with the largest gold holdings.

Pawlicki expects China to continue building gold reserves because its has recently expressed interest in buying strategic commodities while prices are low. Gold is an obvious choice given China’s huge foreign exchange reserves.

The news helped push up prices of gold futures trading on the Comex division of the New York Mercantile Exchange with the price of June gold up by $7.50 to settle at $914.10 an ounce on Friday.

Axel Merk, president and chief investment officer of Merk Mutual Funds, suspects that China’s decision to address its gold reserves is in keeping with the country’s recent efforts to increase transparency as it endeavors to become a more active participant in global financial markets. Lately, the country has been seeking a more active role in the debate over global currencies and Merk suspects that the country is looking to diversify its reserves as a way to become a more active global player. (See “China Seeks Greater Role For Yuan In Trade” and “ Beijing Shows Buyer’s Remorse.”)

China may also see an opportunity in possible gold sales of 400 metric tons by the International Monetary Fund. Merk said buying gold from the IMF would be a way for the Chinese to build its reserves quickly without causing large disruptions to the market.